European financial markets have fallen sharply on fears that despite the slowing global economic growth, central banks are starting to reduce their Covid-19 emergency aid packages.
In London, the FTSE 100 fell 2.3% in morning trade on Thursday before recovering somewhat to close 1.5% at 7,058 as share prices plummeted across the continent after the US Federal Reserve announced support for the world market cut largest economy this year.
In Paris, the French stock market plummeted more than 2%, while stocks in Germany, Italy and Spain fell more than 1%.
Wall Street stock prices remained unchanged in New York’s early afternoon trading on Thursday, stabilizing after the S&P 500 index fell more than 1% on Wednesday following Fed intervention.
Fed officials signaled on Wednesday that the threshold for the US Federal Reserve to curb its quantitative easing (QE) bond purchase program could be exceeded in the final three months of the year, earlier than investors expected.
The Fed buys US Treasuries and mortgage-backed securities worth $ 120 billion every month.
The Fed’s last QE program, launched last year at the start of the pandemic amid the chaos in the financial markets, has increased the total stock of assets held by the central bank after more than a decade of stimulus measures that began during the 2008 financial crisis increased than $ 8 trillion.
Officials indicated that preparations for the relief cut would soon be made, although the Delta variant of Covid-19 was slowing the pace of the global economic recovery, suggesting that economic and financial conditions are “likely in the coming months would justify a reduction ”.
However, some members of the Fed’s Rate-fixing Open Market Committee felt it appropriate to start reducing asset purchases this year, but added: Be appropriate early next year. “
Inflation has skyrocketed this year in several advanced economies due to supply shortages as the recovery from Covid-19 takes off. US inflation hit a 13-year high of 5.4%, well above the Fed’s target rate of 2%. UK inflation fell from 2.5% to 2% in July but is set to rise to 4% this year.
Much of the price hike is expected to be temporary as the Covid disruption subsides, while economists warn that inflation numbers reflect prices returning to more normal levels after a historic slump in the initial lockdown.
However, signs that the world’s most prominent central bank might begin tapering its support measures dropped Asian stocks overnight and extended the Thursday morning sell-off across Europe.
There’s also a focus on whether the Bank of England or the European Central Bank (ECB) will take similar action to scale back bond-buying programs expanded during the Covid pandemic, with investors awaiting possible updates at the annual central bankers meeting in Jackson Hole next Place week.
The ECB’s balance sheet has grown to more than 8 trillion euros (6.8 trillion pounds sterling) while the Bank of England has a QE program worth 895 billion pounds sterling. That month, Michael Saunders, a member of Threadneedle Street’s Monetary Policy Committee, voted to cut its QE program instead of continuing through the year-end as planned.
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Meanwhile, a collapse in global commodity prices put mining stocks under pressure, with commodity companies among the FTSE 100’s biggest losers on Thursday.
Mining company stocks, including Antofagasta, fell more than 4% and commodity giant BHP fell more than 2% as a series of global commodity prices fell. The global oil price fell more than 3%, copper more than 2% and other materials such as steel, aluminum and zinc fell.
Other commodities companies to fall were BP and Rio Tinto, concerned amid concerns about weaker demand as the momentum of economic recovery stalled from lockdowns in several countries.